If you’re thinking about raising money to fund your startup, you need to take a hard look at corporate investment.
More than 95% of all startup exits are by merger and acquisition (M&A) as opposed to initial public offering (IPO). All of those M&A exits came out of relationships that were built way in advance of the exit, including those that started with a single early investment in the startup.
Corporate investment is probably the most under-utilized form of startup capital. Gigantic, usually cash-heavy corporations are sometimes ill-equipped to foster speedy innovation at their size, making them perfect partners for startups aiming to unleash disruption in the same industry or vertical.
When you can’t build innovation, you buy it.
I’ve taken on corporate investment a number of times, most recently at my last startup and my current startup, so this advice is in real time. I’m also advising startups who are using corporate investment as a means to eventually get acquired.
Also, last week I got to sit in a session with John Somorjai, EVP of Salesforce Ventures, at a conference put on by one of my investors. Salesforce’s corporate investment portfolio includes 18 IPOs and 75 more companies acquired, with 13 of those acquired by Salesforce themselves. His advice confirmed a lot of my own experience.
So first, let’s look at the pros and cons.
Why Choose Corporate Investment
There are a number of good reasons to chase and take corporate investment, some obvious and others not so obvious. Here are what I see as the top reasons:
They’ll probably be your biggest initial customer. When you’re just starting out, having a known entity on board is a magnet for other customer prospects, large and small alike. Just make sure that one large customer doesn’t make up too much of your customer base for too long.
They take less equity and get less involved. Because of SEC rules and internal policies, corporations will only take a small percentage of the company, 15% or less. They also usually don’t ask for more than a board observer seat.